Too Big to Fail

Can banks become “too big to fail”, and should they be allowed to stay that way? On September 15th 2008, the investment bank Lehman Brothers filed for bankruptcy. It was, and still is, the biggest bankruptcy filing in U.S. history , with Lehman’s holding $691 billion in assets at the time. The event was the catalyst for the current financial crisis. By the end of trading that day, $700bn had been wiped off the global stock markets. The Dow Jones had plummeted 500 points, its biggest drop since the terrorist attacks of 9/11 . Despite rumours and knowledge that Lehman’s was struggling, with its share price dropping daily, the huge drop in the financial markets was due to the huge shock. No-one had been expecting this, as it was anticipated that the U.S. government would intervene and bail out the bank, as it had done previously for another investment bank Bear Stearns, and for the mortgage firms Freddie Mac (Federal Home Loan Mortgage Company) and Fannie Mae (Federal National Mortgage Association) earlier on in that month. Everybody had assumed that Lehman’s was simply too big to fail. The term “too big to fail” has become a phrase used to describe banks that are so interconnected, so large and so strategically important that if they were to fail the consequences could be catastrophic for the economies they inhabit . In November 2011, the Financial Stability Board released a list of 29 banks worldwide that it considered to be too big to fail, and gave its definition as “systematically important financial institutions are financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity” .
There is an intense debate as to whether banks should be allowed to be too big to fail or not. Those in favour consider the idea that those institutions that are too big to fail should be given special status by the governments